Melbourne's house prices to dive by up to 10%

Economists have warned house prices in Melbourne could further decline, but have assured it won't "derail Australia's economic outlook".

New figures reveal the city’s house values have slumped, with inner-suburbs- including St Kilda, Abbotsford and Albert Park- dropping by 6.1 percent since last year.

Prices in the inner-east have taken a five percent hit, while homes in the inner-south dipped by 4.1 percent.

Melbourne's house prices in the inner-suburbs have substantially dropped since last year. (9NEWS) (9news)

ANZ economists have revised their house price forecasts today, with the weakness persisting longer than they had expected and now see peak-to-trough price declines of around 10 percent in both Melbourne and Sydney.

"This doesn't derail Australia's economic outlook," they state in a report.

"The weaker housing market reflects a regulatory induced tightening in the supply of credit rather than tighter monetary policy. We think, as a result, that the impact on the economy will be less pervasive."

Clearance rates in Melbourne (Albert Park pictured) are the lowest they have been in years. (Domain) (Domain)

Across the nation's eight capital cities, prices fell 0.7 per cent in the March quarter for a modest two per cent rise over the year.

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HSBC chief economist for Australia and New Zealand Paul Bloxham believes given high household debt, the cooling housing market does present a downside risk to the outlook for consumption.

"However, our central case assumes only a modest negative wealth effect, given that households have been building up equity in their properties, rather than withdrawing it, in recent years," he said.

The minutes of the Reserve Bank's June 5 board meeting noted falls in Melbourne house prices had been concentrated in inner-city areas, whereas the declines in Sydney had been more widespread.

"Nonetheless, housing prices were still 40 per cent higher in Sydney and Melbourne than at the beginning of 2014," the minutes said.

Homes in the inner-suburbs, including Abbotsford (Turner Street pictured), are going under the hammer for much less than last year. (Domain) (9news)Homes on the Mornington Peninsula only had a slight decline in price, down 0.1 percent. (Domain) (Domain)

Auction clearance rates in these two cities have also fallen to their lowest levels in a number of years.

Macquarie Securities economist Justin Fabo said while market corrections are always worrisome he believes the regulators would be largely delighted with the orderly cooling of housing markets so far.

"To us the real risk is on the demand side," he said.

He said if households were to lose faith in housing markets given still-elevated prices, the demand for credit could fall more than he expects.

"The main thing to fear for Australian housing is fear itself," Mr Fabo said.